It is time to put financial institutions within the purview of the Fed

Treasury Secretary Henry Paulson hinted Wednesday that he wants the country's patchwork financial regulatory system overhauled. It is a good time to do so. The Federal Reserve is now lending money to investment banks, traditionally supervised by the Securities and Exchange Commission. And the Fed helped rescue Bear Stearns because, in today's interconnected markets, the firm's problems threatened the deposit-taking banks the Fed does regulate. With real levers to deploy, the Fed is well-placed to lead a simpler, more coherent regulatory effort that encompasses all of Wall Street. It isn't a secret that the current regime is a mess. It puts different financial institutions -- or their different parts -- within the purview of the Fed, the Federal Deposit Insurance Corp., the SEC, the Office of the Comptroller of the Currency and a host of others. The United Kingdom long ago folded multiple supervisors into one entity, the Financial Services Authority. The FSA is fallible. On Wednesday, it admitted shortcomings in its supervision of mortgage lender Northern Rock. But at least it can take a holistic view across financial markets. The Fed already trades with the investment banks on its 20-strong list of primary dealers, so it knows them well. That relationship and the Fed's balance sheet give it real muscle. The Fed has traditionally used its power and influence to encourage prudence and pre-empt problems at banks. That is arguably of broader importance than the SEC's more retrospective compliance and enforcement mindset, although that has its place, too. The Fed's monetary-policy role also meshes comfortably with a financial-stability remit, as the feedback loop between the mortgage meltdown and the economy has shown. Of course, the Fed isn't perfect. Some argue, for instance, that its moves to save Bear came too late. But the financial experts at the Fed's New York branch look relatively smart so far. While the U.S. system needs more than just an extension of the Fed's oversight to the rest of Wall Street, it could be a good start.